Don't Sound The Death Knell Just Yet: Trade Secrets Are Still Alive in North Carolina

There has been a lot of hand wringing over the last year after the North Carolina Business Court issued two opinions dismissing trade secret claims brought by employers against their departing employees. The Business Court, charged with hearing complex business litigation cases, held that the employers failed in their lawsuits to describe their trade secrets with particularity. Because the former employees could not determine from the lawsuits which secret information they were accused of stealing, the court threw out the claims.

As a result of these decisions, some attorneys have worried that plaintiffs will have to describe their trade secrets so much in their complaints that the trade secrets will no longer be secret. Trade secret attorney Eric Welsh put it another way, saying that, as a a result of these decisions, employers hoping to assert claims under North Carolina's Trade Secret Protection Act may now face a "Hobson’s choice of disclosing their trade secrets in the complaint to avoid dismissal, thereby undermining their very claim and effectively destroying the value of the information, due to their disclosure, or not bringing the claim in the first place, conceding the trade secret to the misappropriator." Attorney Mack Sperling cut more to the chase, saying defendants' chances of getting trade secret claims dismissed are now "as easy as shooting fish in a barrell."

The first of the two cases to cause concern was Akzo Nobel Coatings, Inc. v. Rogers. Akzo Nobel Coatings sells industrial coatings and specialty chemicals internationally, and it filed suit against a number of former employees who, after resigning from Akzo, formed a new company. Akzo alleged in its lawsuit that these employees used Akzo's "proprietary formulas, methodologies, customer and pricing data and other confidential information" in forming their new company. The Business Court dismissed the claims, saying:

"The sweeping and conclusory allegations in the Complaint fail to identify the trade secrets the Individual Defendants are accused of misappropriating with sufficient particularity so as to enable [the] defendant[s] to delineate that which [they are] accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur."

In other words, the complaint that started the lawsuit did not describe the employer's trade secrets in such a way that the defendant had any idea what he was accused of taking. Therefore, the lawsuit could not proceed.

A few months later, the Business Court dismissed another lawsuit for the same reason. Aecom Technology Corporation, an environmental consulting firm, filed suit against former high-level employees who allegedly conspired with a competitor and transmitted information to it "regarding AECOM's customers, terms of contracts, pricing guidelines and products." Like it did in Akzo, the Business Court held that the "sweeping and conclusory allegations

". . .fail to identify the trade secrets that Defendants are accused of misappropriating with sufficient particularity so as to enable Defendant[s] to delineate that which [they are] accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur."

The employers in both cases no doubt thought their allegations were sufficient. They no doubt had processes, methods, and formulas unique to them, but the court dismissed their claims nonetheless. Thus began the panic. Are trade secrets dead in North Carolina?

Of course not.

The real lesson from these cases is that plaintiffs must do a better job keeping track of what their secrets are. Too many times employers jump into trade secret lawsuits without knowing enough about their own trade secrets, and they hope that generally alleging "processes, formulas, pricing guidelines, etc." will be enough. These decisions demonstrate that it clearly isn't.

Companies should instead conduct full examinations of their business practices and processes. Known as "trade secret audits," these examinations will ultimately answer these questions: "If [insert key employee's name] leaves to work for a competitor, how can he hurt our business?" "What does he know about our business that very few people know?"

For some employees, it will be that they know the specific ratios for raw materials that were used in making the company's product or cooking temperatures and times. Other employees might have been privy to certain password protected computer databases that contained customers' account histories and buying preferences. Others might have helped develop, at significant expense, social media strategies to better market their company. Depending on the business, there will be tens, if not hundreds, of other examples.

After having performed such an audit, employers will be in much better shape if they have to file a trade secret lawsuit against a departing employee. Rather than merely alleging that a defendant stole confidential formulas and processes, the employer could allege instead that "Defendant John Smith was one of only two employees at the company who knew the specific process for converting hydrogen dioxide into wine, including the specific temperatures and conversion times required." Such an allegation does not reveal the actual secrets, and since it gives the defendant a much better idea about what is at issue, a court will be more inclined to let the trade secret case proceed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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